Unified Pension Scheme

26-08-2024

On 24 August, The Union Cabinet, led by Prime Minister Narendra Modi, approved the Unified Pension Scheme (UPS), marking a significant shift in India's pension policy.

The UPS aims to address the limitations of the Old Pension Scheme (OPS) and the National Pension System (NPS).

Unified Pension Scheme (UPS):

Approval and Rollout:

Implementation Date: April 1, 2025.
State Adoption: States can opt to adopt the UPS, which differs from OPS by incorporating employee contributions and addressing the financial sustainability of pension schemes.

Features:

Pension Amount: Guarantees 50% of the average basic pay over the last 12 months of service. For employees with less than 25 years of service, the pension is proportionate, with a minimum of ₹10,000 per month guaranteed for those with at least 10 years of service.
Family Pension: Provides 60% of the retiree’s pension amount to the family in case of death.
Lump-Sum Payment: A lump sum equivalent to 1/10th of the last drawn monthly pay (including DA) for every six months of service is provided in addition to gratuity.
Inflation Protection: Pensions are adjusted based on the All India Consumer Price Index for Industrial Workers (AICPI-IW), similar to Dearness Allowance (DA) adjustments.
Contributory Nature: Employees contribute 10% of their salary, while the government contributes 18.5%. Contributions are subject to periodic adjustments based on actuarial assessments.

Background:

What is the Old Pension Scheme (OPS)?

Features:

Pension Amount: Guarantees 50% of the last drawn basic pay as pension, providing a stable and predictable post-retirement income.
Family Pension: Continues the same pension amount to the family upon the retiree’s death.
Gratuity: Entitles employees to a gratuity of up to ₹20 lakh upon retirement.
Employee Contributions: No salary deductions for pension contributions during employment.
Dearness Allowance (DA): Pensions are adjusted periodically based on DA, which compensates for inflation.

Financial Aspects:

Funding: Financed directly from the government’s treasury, making it an unfunded scheme.
Challenges: Became financially unsustainable due to increasing life expectancies and rising pension liabilities, creating strain on government finances by 2020-21.

What is the National Pension System (NPS) ?

Features:

Contribution: Employees contribute 10% of their basic salary plus Dearness Allowance (DA), with a matching government contribution. This rate increased to 14% in 2019.
Pension Amount: Pension depends on the accumulated corpus and investment returns. Upon retirement, individuals can withdraw 60% of their corpus tax-free, with the remaining 40% used to purchase an annuity for a monthly pension, typically around 35% of their final salary.
Investment Options: Offers various investment schemes managed by fund managers, allowing employees to choose between different risk profiles.
Tax Benefits: Contributions are tax-deductible under Section 80 CCD of the Income Tax Act, but withdrawals and pension payouts are subject to taxation.

Criticisms:

No DA Adjustments: Unlike OPS, NPS does not provide automatic DA increments for inflation, leading to unpredictable pension amounts.
Market-Linked: Reliance on market-linked investments results in variable pension returns and dissatisfaction among employees.
Mandatory Contributions: The scheme’s mandatory contributions and tax implications have been contentious.

Comparison and Implications:

Advantages of UPS Over OPS:

Guaranteed Pension with Inflation Protection: The UPS offers a guaranteed pension with inflation adjustments based on AICPI-IW, combining stability with modern inflation protection.
Minimum Pension Guarantee: Introduces a minimum pension of ₹10,000 per month for those with at least 10 years of service, addressing gaps in the OPS.
Contributory Aspect: Balances financial sustainability with employee benefits through a contributory system, unlike the non-contributory OPS.

Advantages of UPS Over NPS:

Fixed Pension Amount: Provides a predictable pension based on the last drawn salary, contrasting with the variable returns of NPS.
Inflation Indexation: Includes inflation protection similar to OPS, reducing the pension volatility seen in NPS.
Lump-Sum Payment: Offers additional financial support through a lump-sum payment upon retirement, enhancing overall retirement benefits.

Reactions:

Prime Minister’s Statement: Modi emphasized the UPS’s role in providing financial security and dignity for government employees, reflecting a commitment to their well-being.
Mixed Reactions: Employee representatives showed varied responses. The Central Secretariat Service Forum welcomed the UPS but continued to demand OPS, while others expressed concerns about the contributory nature.

Conclusion:

The Unified Pension Scheme aims to blend the stability of the Old Pension Scheme with the modern features of the National Pension System. By ensuring a fixed pension amount with inflation adjustments and providing additional lump-sum payments, the UPS seeks to offer a more predictable and secure retirement plan. It addresses the criticisms of the NPS while preserving the financial predictability of the OPS, aiming to provide a balanced solution for government employees.